Copper fell 1 percent in choppy trade on Friday, losing grip of a 4-1/2 month high above $4,000 as a leap in inventories kept questions over the extent of demand alive. Aluminium and zinc hit their highest in more than two months, before tracking copper lower as the dollar rebounded and erratic trade in equities failed to provide support.
Copper for three-months delivery on the London Metal Exchange fell to an official close of $3,955 a tonne, after rallying to $4,075 a tonne, its highest since November 10. It closed at $3,999 a tonne on Thursday. "I dont think that the market is ready yet to trend higher in any sustained way," said Triland Metals analyst Michael Khosrowpour.
An equity markets rally, which has strongly correlated with metals, expectations of further Chinese buying and US Federal Reserve plans to buy longer-dated US government debt boosted copper prices by more than 10 percent this week and around 20 percent so far this month. "Copper has been surprisingly resilient," Richard Knights, an analyst at Numis Securities, said. Moreover, a big jump of 10,500 tonnes in copper inventories weighed on prices.
Cancelled warrants - material earmarked for delivery - rose to 24,525 tonnes from Thursdays 22,650 tonnes. The rapid rise in cancelled warrants, signalling further stock drawdown from the warehouses, coupled with copper purchases from the State Reserves Bureau (SRB) in China, the biggest consumer of the metal, had given it a boost in recent weeks. Macquarie Bank said the SRB could buy another 600,000 to 900,000 tonnes for the rest of 2009.
"There is also speculation of more SRB buying in the second half and the reduced supply of copper scrap in the physical market," said Macquarie analyst Bonnie Liu. "But fundamentally, we think this rally is overdone and there is going to be a correction because this market has been overbought." Budding expectations about the recovery in Chinas real demand for industrial metals may prove premature, despite a batch of strong indicators, as stimulus measures are expected to take time to revive the sector.
Three-month aluminium closed at $1,459 a tonne, after rising to $1,492 a tonne, its highest since January 16 and compared with Thursdays $1,463. Zinc was at $1,260 after rising as high as $1,308 a tonne and versus Thursdays $1,264, while battery material lead was at $1,346 from $1,325. Tin was at $10,100 from $10,200, while steel making ingredient nickel was at $10,000 from $10,005.